Marvell Technology, Inc. (NASDAQ:MRVL) Q3 2024 Earnings Call Transcript

Marvell Technology, Inc. (NASDAQ:MRVL) Q3 2024 Earnings Call Transcript November 30, 2023

Marvell Technology, Inc. beats earnings expectations. Reported EPS is $0.41, expectations were $0.4.

Operator: Good afternoon, and welcome to Marvell Technology Inc. Third Quarter of Fiscal Year 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn this conference over to Mr. Ashish Saran, Senior Vice President of Investor Relations. Please go ahead.

Ashish Saran: Thank you, and good afternoon, everyone. Welcome to Marvell’s third fiscal quarter 2024 earnings call. Joining me today are Matt Murphy, Marvell’s Chairman and CEO; and Willem Meintjes, our CFO. Let me remind everyone that certain comments made today include forward-looking statements which are subject to significant risks and uncertainties that could cause our actual results to differ materially from management’s current expectations. Please review the cautionary statements and risk factors contained in our earnings press release, which we filed with the SEC today and posted on our website, as well as our most recent 10-K and 10-Q filings. We do not intend to update our forward-looking statements. During our call today, we will refer to certain non-GAAP financial measures.

A reconciliation between our GAAP and non-GAAP financial measures is available in the Investor Relations section of our website. Let me now turn the call over to Matt for his comments on this quarter. Matt?

Matt Murphy : Thanks, Ashish, and good afternoon, everyone. For the third quarter of fiscal 2024, Marvell delivered revenue of $1.42 billion, growing 6% sequentially above the midpoint of guidance. In addition, on a non-GAAP basis, the Marvell team drove a sequential increase in gross margin, remain disciplined on operating expenses and delivered EPS of $0.41, above the midpoint of our guidance. We are pleased with our results in execution. In our data center end market, revenue for the third quarter was $556 million, well above our guidance, driven by stronger than forecasted AI revenue. We are also encouraged by revenue from cloud, returning to year-over-year growth. On a sequential basis, overall data center revenue grew 21% in the third quarter, while cloud grew well in excess of 30%.

As expected revenue from the enterprise on-premise portion of our data center end market declined sequentially in the third quarter, reflecting weakening demand. Demand for data center storage also remains depressed, and industry expectations for recovery have continued to push out. In cloud, revenue from both AI and standard cloud infrastructure grew sequentially, with AI growing significantly faster. Growth was broad based led by our PAM4 optical products. Teralynx Ethernet switches, as well as our data center interconnect, or DCI products. Earlier today, we released a video highlighting our long standing collaboration with NVIDIA, where using Marvell’s optical interconnect technology to enable the bandwidth scale and reliability required by Generative AI.

Marvell has built a broad product portfolio which are customers are relying upon to power their accelerated computing infrastructure. We are benefiting from strong demand for 800-gig PAM electro-optic products, tightly correlated to the growth of in deployment of AI accelerators. In fact, we are seeing the overall attach rate of our PAM products to accelerators being higher than one to one in high performance AI systems currently shipping in the market. We’re also seeing strong customer traction for our next generation 1.6T 200-gig per lane PAM platform, that we started sampling this past April. Customer qualifications have begun and we are looking forward to ramping our 1.6T solution into production. Complementing our optical solutions, we expect our PAM DSPs for the active electrical cable, or AEC market to start ramping in our next fiscal year in Tier 1 cloud deployments.

We also demonstrated our 224 gigabits per second, long-reach SerDes at the OCP Global Summit held in October. We expect that this technology will serve as a building block for our next generation 200-gig per lane AECs. In our switching portfolio, we are making great progress on our next generation 51.2T cloud switching platform. At OCP, we demonstrated Marvell’s 51.2T solution, operating at full capacity with very low industry leading latency running on SONiC. Our enabled Meta SONiC and agile open source network operating system is very important for cloud customers who value the flexibility, interoperability and scalability of an open Ethernet switch ecosystem. Customers have started development on our 51.2T solution, and we look forward to ramping this platform into production.

In addition, earlier this week, we announced our membership in the Ultra Ethernet Consortium. This is another step in our commitment to driving continuous innovation on an open Ethernet based cloud fabric, which can deliver the scale and performance required for next generation workloads including generative AI. As our 400 gig DCI modules continue to ramp, we’re also seeing strong interest for our next generation 800 gig products that we launched this past October. These modules are based on our new 5-nanometer 800 gig coherent DSP and silicon photonics, or SiPho platform, which integrates multiple discrete components within a single device. This level of integration enables the performance and packaging density required for small form factor pluggable modules to grab a high bandwidth signal across long distances between data centers.

Marvell’s SiPho platform has accumulated billions of operating hours over the past seven years in DCI applications. In addition, we are starting to see emerging applications for our field proven SiPho technology to power next generation higher bandwidth and optical connections inside data centers. We look forward to updating investors as this opportunity unfolds over time. Cloud customers remain focused on enhancing their AI offerings by building custom compute solutions of their own, and we have already won a number of these designs. We have completed qualification of 1 key AI project and have started wafers under production. For another project, we have received first silicon back from the fab and the initial testing is looking positive.

As a result, we expect both of these custom compute programs to start volume production next year. Turning now to our guidance for overall data center end market. In the fourth quarter of fiscal 2024, we expect revenue from our data center end market to grow in the mid-30% range on a sequential basis. In our last earnings call, we provided a forecast for AI revenue to cross a $200 million quarterly run rate exiting this year. Since then, demand has continued to grow, and we now expect our AI revenue in the fourth quarter to come in significantly above our forecast. In addition to strong growth from AI, we also expect revenue from standard cloud infrastructure to grow sequentially in the fourth quarter. For the enterprise on-premise portion of our data center end market, we expect revenue to decline sequentially in the fourth quarter.

Turning to our carrier infrastructure end market. Revenue for the third quarter was $317 million, above guidance growing 17% year-over-year and 15% sequentially. The overachievement in the third quarter was driven entirely by the wireless portion of our carrier end market. Marvell specific product cycles have enabled our wireless revenue to buck the trend of a soft end market for several quarters. However, we have been forecasting for some time that this wave of above-market wireless growth for Marvell would start to decline by the fourth quarter as the initial wave of 5G rollout completion. Additionally, demand is continuing to soften as carriers are managing CapEx in a difficult macroeconomic environment. As a result, following an extended multiyear period of strong growth, we are expecting a period of digestion.

In addition, we expect revenue from the wired portion of our carrier end markets to continue to decline, reflecting weakening demand. As a result, for the fourth quarter, we expect revenue from our overall carrier end market to decline in the mid-40% range on a sequential basis. Looking longer term as data traffic continues to grow, we expect that operators will need to continue to invest in adding capacity in both the wireless and wired end markets. We also expect to benefit from share gains, including significant 5-nanometer base station design wins, which we have won but are not in production. We are optimistic that carrier CapEx will normalize over time, and our revenue from this end market will return to growth. Turning to our enterprise networking end market.

Revenue for the third quarter was $271 million, declining 28% year-over-year and 17% sequentially. As we have been signaling, we see weak demand in this end market. As a result, for the fourth quarter of fiscal 2024, we project enterprise networking revenue to decline in the mid-single digits sequentially on a percentage basis. Turning to our automotive and industrial end markets. Revenue in the third quarter was $107 million, growing 26% year-over-year and declining 3% sequentially. Looking to the fourth quarter of fiscal 2024, we expect revenue from our overall auto and industrial end market to decline by approximately 20% on a sequential basis. We expect the sequential decline to come from our industrial end market, which includes aerospace and defense, where order patterns can be lumpy in any given quarter.

Moving on to our consumer end market. Revenue for the third quarter was $169 million, declining 5% year-over and growing 1% sequentially. In the fourth quarter, we are expecting revenue from the consumer end market to sequentially decline in the mid-teens on a percentage basis. In summary, we delivered revenue and non-GAAP earnings above the midpoint of guidance for the fiscal third quarter. The diversification in our end markets is serving us well with strong growth from AI and cloud carrying us through a softening demand environment across other end markets. Through fiscal 2024, the Marvell team has continued to execute in a dynamic environment, remaining focused on driving continuous improvement on what we can control while dealing with inventory corrections and macroeconomic-induced demand headwinds in many end markets.

We reprioritized our investments to align to the highest ROI opportunities in front of us. Our team drove efficiency improvements to reduce operating expenses, and we are well on track to meet our commitment. We’ve worked proactively with our customers and suppliers to best manage inventory across the combined supply chain. Our operations group has rapidly responded to the increase in demand from AI. At the midpoint of our guidance for the fourth quarter, we are forecasting that our revenue for the second half of this fiscal year should grow approximately 7% over the first half. In addition, we are forecasting a 300-plus basis point sequential improvement in our non-GAAP gross margin in the fourth quarter. This projection reflects our expectation for an improving product mix as well as a multi-quarter cross-functional effort to further optimize our cost structure.

Heading into next year, while we don’t typically guide beyond a quarter, we expect softness in demand to impact revenue from our enterprise and carrier markets in the first quarter. We also anticipate a significant reduction in consumer end market revenue due to seasonality in demand and the completion of deliveries for an end-of-life program in the fourth quarter. Although the enterprise and carrier markets are experiencing near-term headwinds, these large and long-lasting end markets are critical to the global economy. So we expect them to recover and turn into our revenue tailwind over time. In the meantime, our data center revenue is growing rapidly, reflecting our emergence as a key enabler of accelerated computing. We project data center revenue, driven by the ongoing strength in our connectivity solutions inside and between data centers to grow to over 50% of our total revenue in the fourth quarter.

Longer term, we expect additional tailwinds to data center growth from the ramp of multiple custom accelerated compute programs for AI. We are also looking forward to a number of new Marvell products entering the data center market, as I discussed earlier. With that, I’ll turn the call over to Willem for more detail on our recent results and outlook.

Willem Meintjes: Thanks, Matt, and good afternoon, everyone. Let me start with a summary of our financial results for the third quarter of fiscal 2024. Revenue in the third quarter was $1.49 billion, exceeding the midpoint of our guidance, declining 8% year-over-year and growing 6% sequentially. Data center was our largest end market driving 39% of total revenue. The next largest was carrier infrastructure with 22%, followed by enterprise networking at 19%, consumer at 12% and auto industrial at 8%. GAAP gross margin was 38.9%. Non-GAAP gross margin was 60.6%, growing 30 basis points sequentially, driven by higher revenue and cost improvements. Moving on to operating expenses. GAAP operating expenses were $698 million, including stock-based compensation, amortization of acquired intangible assets, restructuring costs and acquisition-related costs.

Non-GAAP operating expenses were $437 million, in line with our guidance. GAAP operating margin was negative 10.3%. Non-GAAP operating margin was 29.8%. For the third quarter, GAAP loss per diluted share was $0.19. Non-GAAP income per diluted share was $0.41, $0.01 above the midpoint of guidance. Now turning to our cash flow and balance sheet. Cash flow from operations in the third quarter was $503 million, which grew by $391 million sequentially. This significant growth was driven by our relative improvement in DSO, lower inventory along with better profitability. Our inventory at the end of the third quarter was $942 million decreasing by $74 million from the prior quarter. Our DSO was 78 days, reducing by 4 days from the prior quarter. Our CapEx was $54 million.

We returned $52 million to shareholders through cash dividends and we repurchased $50 million of our stock during the third quarter. Our total debt was $4.19 billion. Our gross debt-to-EBITDA ratio was 2.21 times and net debt-to-EBITDA ratio was 1.83 times. During the quarter, we issued new bonds and used the proceeds to pay down our upcoming debt maturities. With our investment-grade credit rating, we were able to execute this refinancing while decreasing our average interest rate on our outstanding debt balance. In addition, we increased our average debt maturity from 3.9 years to 5.3 years. As of the end of the third fiscal quarter, our cash and cash equivalents were $726 million increasing by $202 million from the prior quarter. Turning to our guidance for the fourth quarter of fiscal 2024.

We are forecasting revenue to be in the range of $1.42 billion, plus or minus 5%. We expect our GAAP gross margin to be in the range of 48.2% to 50.7%. We expect our non-GAAP gross margin to be in the range of 63.5% to 64.5%, with the midpoint projected to be back to the low end of our long-term target model. Our forecast for this large sequential improvement is driven by expectations of a significantly stronger product mix and our ongoing cost optimization activities. Looking forward, we expect that product mix as well as the overall level of revenue will remain key determinants of our gross margin in any given quarter. For the fourth quarter, we project our GAAP operating expenses to be approximately $680 million. We anticipate our non-GAAP operating expenses to be approximately $430 million.

This level of operating expense reflects the completion of the cost reduction plan we communicated in our first fiscal quarter of this year. Looking ahead to the first quarter of fiscal 2025, we anticipate typical seasonality in payroll taxes and employee salary merit increases. As a result, we expect OpEx to increase by mid- to high single digits on a percentage basis. For the fourth quarter, we expect other income and expense, including interest on our debt to be approximately $50 million. We expect our non-GAAP tax rate of 6% for the fourth quarter, increasing to 7% in fiscal 2025. We expect our basic average shares outstanding to be 865 million and our diluted weighted average shares outstanding to be $874 million. We anticipate GAAP earnings per diluted share in the range of a loss of $0.08 to a gain of $0.02 per share.

We expect non-GAAP income per diluted share in the range of $0.41 to $0.51. Operator, please open the line and announce Q&A instructions. Thank you.

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Q&A Session

Operator: [Operator Instructions]. And our first question will come from Toshiya Hari of Goldman Sachs. Please go ahead.

Toshiya Hari: Hi, good afternoon. Thank you so much for taking the question. Matt, I had a multipart question on your data center business. It sounds like the outlook has improved since 90 days ago. Just curious how if you can size the AI business for us where you landed in the October quarter, it sounds like you’ll be in excess of $200 million in Q4, but the outlook there. And then more importantly, into calendar ’24, if you can speak to visibility you have across your optical business as well as the compute business that would be helpful. Thank you.

Matt Murphy: Yes. Thanks, Toshiya, for the question. We’re very pleased with the performance of our data center business grew over 20%. In Q3, we’re guiding it up 35%, in Q4, as you noted, that is driven by AI and the Q4 exit rate is well north now of $200 million. What’s very encouraging as well is that the traditional cloud infrastructure piece of it is also growing nicely. That’s come back very strong for us. And those two will be growth drivers for us into next year. We see continued weakness in softness, and this is a broader market statement than the on-premise piece and that probably persists for some time, but the mix now of cloud and AI is so much higher that it’s driving the overall segment in a very positive trajectory, both in the third quarter and into the fourth quarter.

And then as we head into next year, as you’ve seen, most of the strong growth we saw in the current fiscal year in AI and cloud infra for that matter has been in the optics area, but we are tracking well for growth their next year as well as the ramp of our custom silicon programs. And in my prepared remarks, I talked about the strong progress we made on new product development and starting to plan for ramps there. So while we’re not resizing those specifically, those — the performance clearly in the fourth quarter as well as what you would how you think about next year is much, much stronger than when we first signaled the AI opportunity for Marvell a couple of quarters back. So I think things are tracking nicely. And as you said, compared to 90 days ago, I think the overall aggregate data center business, as you can see from our results, is doing quite well.

Toshiya Hari: Thank you.

Operator: The next question comes from Tim Arcuri of UBS. Please go ahead.

Timothy Arcuri : Thanks a lot. Matt I also had a multipart question. So enterprise networking is going to be down about 35% from the peak in fiscal Q4. And the customers are still though reporting that their inventory levels are actually going up. So is this Marvell product? Is this product from another supplier? And can you talk about just the dynamics going on in that segment? And then also for fiscal Q1, do you still think that revenue can grow? I know you said that networking is down and carriers down. But data center would be up. Do you think that total revenue can be up? Thanks.

Matt Murphy: Yes. Thanks, Tim, and appreciate the creativity on the 2-parter, but no problem. On the enterprise side, it’s hard to comment. I mean if you look, balance sheets are still pretty heavy from the OEMs out there. We’ve been saying, I think since even going back to December of last year that enterprise was going to come down this year and it’s just continued to come down. I think there’s a combination of both inventory management at the OEM level as well as from some of the projections you see out there at the end market level, a softer and more weakening demand environment. So we still feel very good about our position. We had grown this business significantly from where it was just a few years ago. We had great years the last couple of years and even in the first half of this year.

So we’re going through what would be kind of a normal inventory correction cycle. It’s taking a little bit longer than we thought if you went back to the beginning of the year, but I also think the macro and the environment has deteriorated more than we would have anticipated at that time. And so we see it down, and we see that having to work through that issue for the next couple of quarters. On Q1, while we don’t guide specifically, I understand what you’re looking for. I think the way to think about it is that, and I guess I gave the information. Carrier is down after a really great run in Q4, that’s going to stay weak. The telco environment and CapEx spending is very constrained out there and the end customers seem to be having some trouble.

We talked about enterprise being down. And then on consumer, which actually did a little bit better than we thought it would have this year. The last time buy program that we had has been largely going to conclude now in the fourth quarter, and so we see a stepping down there. So, if you kind of add all that up, that’s about half our revenue that’s going to come down in Q1. And then the real question is the data center strength and how does that continue? And it’s too early to call, but just the way to think about it is it’s a lot to offset at this juncture when you have that much of your revenue coming down. The last thing I would say, though, on carrier and enterprise is that these are — this is a cyclical downturn on these and the kind of design win strength we’ve had in the design position we had is such that these will recover, and they will come back to a normalized run rate over time.

And when that happens, that will be a tailwind to EPS and a tailwind to revenue growth as that kind of think of it as the base business of Marvell returns to growth. And in the meantime, our diversified strategy is working well because we’ve got AI and cloud that’s really firing on all cylinders. So a lot of information there. You guys are going to have to up with your own model, but hopefully, that gave you some pieces on how to think about it.

Timothy Arcuri: Wonderful. Thanks.

Operator: The next question comes from Vivek Arya of Bank of America. Please go ahead.

Vivek Arya : Thanks for taking my question. Matt, so I think in the data center, the value of the optics business, I think, is well understood and appreciate it. The challenge is still for us to how we value your ASIC business. So is it 1 or 2 customers? Is it more customers? How is the visibility for the next 1 or 2 years? Like are we talking $100 million to $200 million next year? Are we talking $300 million, $400 million next year? Because unless we have a good way of sizing what this business is and what the visibility and what the growth potential, it’s just very hard to value and give appropriate value to Marvell for this business. So could you just help us understand what is the right way you think about your ASIC business, can the lumpiness here really swing your sales next year?

Matt Murphy: Yes. Thanks, Vivek. I think a couple of ways to think about it. The first is on the customer opportunity, just by design, it’s highly concentrated, if you think about it. And there’s just a handful of companies that can really drive the kind of silicon TAM opportunity that that’s out there. And you’ve probably seen in the last few weeks, there’s just been a tremendous number of announcements across the industry around AI, whether it’s strategic partnerships that are being announced, people doing their own silicon, behind that, their own silicon. There’s typically partners there, people like Marvell, who are going to participate. So a lot of activity, you can see and I would say even one broader statement, then I’ll get to your question.

We do see as the TAM is moving from traditional computing architectures to accelerated computing, it is really opening up the custom silicon piece of that. And so that we believe will be a larger portion of the TAM going forward. When we talked about sizing, if you remember, a couple of quarters back, our AI opportunity, we had signaled already that this year, we would do about $400 million on the optical area. Well, said another way, we do about $400 million this year in total AI revenue, most of it driven by optics and that next year would be about $800 million. That was the original sort of bogey we put out to help investors to your point, size this. And then you would assume some optics growth, and so you could sort of do the math on what the difference might be.